ESG has become more important over time. As recently as 2021, improving ESG ranked only seventh on the list of priorities. Society is changing. The contemporary enterprise must adapt and evolve to reflect this dynamic.

However, the recent Supreme Court decision on affirmative action in the context of college admissions casts uncertainty over what organizations can and cannot do. If Harvard cannot include diversity in its recruiting objective function, then what does that mean for companies that seek to source goods and services from a broader array of suppliers?

While this Harvard Business Review article talks about diversity in hiring, its conclusion extends to sourcing:

“So long as employers do not use protected characteristics like race and sex when making concrete employment decisions, they are free to promote a more inclusive culture and break down barriers preventing women, people of color, and other marginalized groups from thriving in their workplaces.”

The same conclusion applies to sourcing. If business-to-business buyers can purchase goods and services in a way that removes barriers inhibiting suppliers with historically disadvantaged backgrounds, then they can obtain the ESG outcomes they prioritize. There are many ways we can describe what it means to remove obstacles. We could say that we are “leveling the playing field,” for example. What we’re talking about is making procurement more competitive for everyone.

Some of the challenges include the bureaucracy, the difficult systems, the back-and-forth, the length of the cycle, the difficulties obtaining buyer internal consensus, etc. All of these discourage engagement by smaller vendors.

Making it easier for smaller suppliers to compete for business is good for diversity.

Competitive sourcing leads to diverse sourcing because so many members of historically disadvantaged groups seek economic independence through entrepreneurship. Potential suppliers are increasingly diverse. Myriad studies confirm this, including this one from the Kaufman foundation.

There are many stories of immigrants who have come to Silicon Valley and started up technology companies with blistering success. A far more common path is for people from historically disadvantaged backgrounds to start up a small business that plugs into a broader supply chain. Imagine, for example, a small office cleaning company that is part of a larger supply chain in maintaining a large office building.

Why do these people want to have their own businesses? For the same reasons anyone hangs out their own shingle. The possibility of economic independence and control is attractive. Ironically, workplace bias may encourage entrepreneurship in diverse communities by forcing people into it. Maybe these people didn’t (or couldn’t) succeed in a corporate environment, or they couldn’t get hired in the first place because of cultural reasons. Let’s not forget that the original large rallies for civil rights talked about jobs, too.

Entrepreneurship and equity ownership are pathways to wealth in the Western world. Combine that with control over one’s destiny and working conditions and it’s easy to understand why so many people from minority groups establish their own businesses.

What do buyers want from suppliers? Capacity and capabilities.

How do suppliers get this? They need experience, which in turn requires relationships and access  to capital. Too often, it’s a vicious spiral. Diverse suppliers lack relationships, so they can’t get contracts as part of established supply chains. Without this experience, it’s hard for them to access capital to fund growth. Smaller companies aren’t exactly in a position to bid for prime contracting positions.

Relationships are central to the problem.

Large enterprise buyers can require prime contractors and every contractor beneath them in the chain to open their networks to smaller and growing businesses with mentoring, opportunities, and references.

The key word here is “smaller.” Cast a wide enough net for smaller firms and there will be more than enough diverse companies in their supply chains.

Large enterprise buyers can demand visibility into the chain for specific projects to ensure they understand the characteristics of each vendor. This has the additional benefit of aiding risk management. The large enterprise can count the diverse suppliers in the chain towards their own ESG goals.

Of course, this requires a tool for sourcing visibility. But it needs more than that. The right platform engenders an ecosystem. Ideally, these new relationships grow roots that transcend the initial project, providing growth opportunities for these smaller vendors in subsequent new projects.

Some people may argue that it’s not feasible to purchase goods and services in this manner.

Look at the tremendous strides New York State has made by strongly encouraging their prime contractors to develop smaller ones.

“The Governor also announced that New York State has surpassed its goal for MWBE utilization on New York State contracts with a utilization rate of 30.64 percent during the 2022 Fiscal Year, the highest MWBE utilization rate in the country for the second year in a row.”

Diverse sourcing is still possible in the aftermath of the Supreme Court decision, but CPOs focused on ESG need to approach this objective from the right angle: removing barriers to competition faced by smaller companies throughout supply chains. The key link here that CPOs can exploit is the strong and growing relationship between entrepreneurship and diversity. We know that it can work. New York State shows that it can. Primes get deeper subcontractor networks. Buyers get full visibility into how their third-party spend is helping smaller companies develop capacity and capabilities and access capital. All of this matters for the same reason that ESG matters. It reflects a broader societal push to change and evolve.

This is what we have built at EdgeworthBox. We have built a procurement technology solution that makes it easier for buyers to engage suppliers with a simple user experience. We offer a pathway to full supply chain visibility in procurement with our social networking functionality. We help build supplier ecosystems that helps promote the development of smaller vendors. We’d love to talk to you about your specific situation. Give us a shout.

In the panic of this moment, diversity policy changed from a feel-good conversation about good intentions to a reactive scramble to be seen to be doing something. Large corporations roll out money for projects related to education, justice, and increased opportunities, or they deposit cash with financial institutions serving primarily Black communities. Shocked into recognizing the homogeneity of their workforces, leaders express a newfound interest in outcomes.

All of this ignores the CEO’s greatest power to make the playing field more level for everyone: spending with third-parties. It is a truism that “business spend is a lever that can change the world.” According to Digital Commerce 360, annual U.S. business-to-business sales are $7.4 trillion.

Supplier diversity programs have been an obscure, middling corporate commission in which sourcing from businesses owned by members of historically disadvantaged groups often ends up segregated from mainstream procurement in a box-ticking exercise, consigned to providing inessential goods and services. It is nothing more than “window dressing and marketing fluff.” As McKinsey writes, “Talking purpose without walking it can expose you to claims of hypocrisy – ‘woke washing,’ in the memorable phrase of Unilever CEO Alan Jope.” In practice, corporate social responsibility was nothing more than an ideological diversion from strategy. Too often, supplier diversity quota-filling meant paying an extra couple of percentage points to a diverse managed service provider who then sourced from mainstream companies.

CEOs no longer have the luxury of treating supplier makeup as an administrative after-thought for their procurement departments to manage. The eyes of the world are focused on everything they do. Customers, employees, and governments all want to understand how companies do what they do, including how their supply chains work.

There are specific steps firms can take to ensure they give Black businesses (and small business, generally) fair access to all of their third-party spend:

Reduce Bureaucracy: The primary obstacle, particularly for small businesses, is the administrative burden buyers impose on suppliers, ostensibly as part of a risk management exercise. Vendor management systems require answering convoluted, company-specific questionnaires and supplying documents. IBM, for example, has approximately 70 steps to onboard a vendor with roughly 80% of the steps duplicated across vendors. It is often difficult to find out when buyers are in the market, issuing requests for proposals. Standardize vendor onboarding across firms, develop templates for commonly purchased items, and massively simplify the use experience.

Mentor Small Suppliers: Large buyers and their prime contractors need to develop relationships with smaller businesses so that they can mentor them as sub-contractors and, eventually, as prime contractors. Show them what they need to do to win your business instead of assuming that they should know as others with different networks and backgrounds might.

Implement a Rooney Rule for Sourcing: Just as the NFL requires teams “to interview at least two external minority candidates for head coaching openings, and at least one minority candidate for any coordinator job,” buyers should require that every sourcing project considers at least two businesses led by those from historically disadvantaged backgrounds, either as direct providers or as meaningful sub-contractors with a significant portion of the economics of the transaction.

Disclose Supplier Information: The SEC requires companies with publicly-traded securities to disclose material information so that investors can assess risk and opportunity. CEOs must acknowledge that the makeup of their supply chains is now a permanent risk to corporate viability. They should disclose their targets, their policies, and their performance alongside their financial results.

Of course, there are those who will argue that these suppliers are not chosen because they can’t deliver, that they are too high risk, and that the procurement bureaucracy exists to manage the firm’s risk. The blessing of 2020 has been to demonstrate how weak this argument is. Covid, trade disruptions, and cybersecurity events have shown corporate sourcing was too concentrated, geographically mismanaged, and, generally, brittle. If anything, diversifying the supplier base with local vendors can only strengthen the enterprise.

Corporate America will have to evolve their failed diversity policies into inclusion-driven behavior embedded in the enterprise DNA. Racism is an externality with consequences for everyone. It is a profoundly distortionary drag on economic activity. The biggest argument for eliminating economic racism is not about distribution but rather in terms of efficiency. Corporate procurement is central to unraveling this knot. Fix this and CEOs can have tremendous impact on both their own profits and the wellbeing of society.

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